Annual Meeting Holdup: Securities Class Action Lawyers’ Latest Scheme

You’re a publicly traded company, and it’s a week before your annual meeting. The SEC had no objections to your proxy statement, and it’s been sent to shareholders. Your focus should be on final meeting details, but instead, you are working with your lawyers to fend off a class action lawsuit which threatens to forestall the meeting.

This is not a bad dream, but an awake nightmare that an increasing number of public companies are facing. It’s the latest securities class action lawsuit “innovation” — just before an annual meeting, allege that a company’s proxy statements omit “material” information and thus violate general state-law duties to disclose; demand trivial changes to the proxy and high-six-figure fees; and stalk your next victim.

As leading securities defense litigator Bruce Vanyo noted at D&O Diary, at least 20 companies have faced such suits this year, with most claims involving advisory “say on pay” votes and votes on other compensation issues such as stock purchases. The suits are a mutation of disclosure-oriented class actions that are routinely filed against companies going through mergers or acquisitions. These new proxy challenges are of the cookie-cutter ilk common in securities class actions, with the same law firm and often the same investor acting as the lead plaintiff.

Success in a March proxy disclosure suit against Brocade Communications inspired a steady drip of class actions throughout 2012. In that case, a California state judge issued a preliminary injunction two days before Brocade’s meeting. The next day, Brocade agreed to add information to its proxy statement, and hand $625,000 over to the lawyers — great for Brocade that the meeting proceeded, not so great for the other 19+ companies that have subsequently been sued. Three of those targets, WebMD, H&R Block, and NeoStern, similarly bowed down and paid up.

Of course, as one commentator has pointed out, even if you agree to add disclosures, that could very well inspire further disclosure demands. This disappearing line in the sand approach usurps the business judgment on compensation from the corporate board and hands it over to plaintiffs’ lawyers and judges.

Thankfully, targets of these strike suits are beginning to fight back. AAR Corp., posed with a class action filed 8 days before its annual meeting, aggressively opposed the plaintiff’s demand for an injunction in the Northern District of Illinois. AAR argued that neither the federal Dodd-Frank Act nor Delaware law required the information plaintiffs sought related to an advisory say on pay resolution. The information, AAR added, was already in the proxy, publicly available, or non-material.

At the injunction hearing, the plaintiff’s lawyer conceded that no judicial precedents supported his case and that instead, the court should look to the disclosure practices of other companies and conclude that as a matter of law, AAR’s proxy was deficient. The plaintiff didn’t bother to address the essential issue of irreparable harm in his reply brief either, an oversight which the lawyer unsuccessfully attempted to remedy in the hearing. The judge rejected the plaintiff’s injunction request from the bench, allowing AAR’s meeting to proceed. Since then, AAR has filed a motion to dismiss.

Posed with a copycat strike suit filed a little over a month prior to its November 28 annual meeting, Microsoft opposed the plaintiff’s preliminary injunction motion. Last Wednesday, the plaintiff voluntarily dismissed the complaint with prejudice.

Hopefully this trend of opting to litigate over settling will continue, as that is the only way to expose the paper-thin factual allegations and legal theories that this single plaintiffs’ firm is advancing. Businesses already have more than enough litigation toll booths to navigate on the road to growth and profitability.